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Bank of England policy maker Andrew Sentance said the U.K. recession may be “bottoming out,” setting the scene for a recovery as soon as this year.

“The very big policy stimulus that has been provided by fiscal and monetary authorities around the world should now be beginning to be felt,” he said in a speech in Aberdeen, Scotland yesterday. “We should be able to look forward to a recovery beginning either later this year or early 2010.”

The central bank left the key interest rate at a record low of 0.5 percent this month and is printing 125 billion pounds ($204 billion) of money to buy bonds and spur economic growth. Data yesterday showed manufacturing rose for a second month in April, prompting the National Institute of Economic and Social Research to estimate the recession reached a trough in March with economic output growing in the following two months.

“It is encouraging that in recent months we have seen some promising signs that the recession — here in the U.K. and globally — may now be bottoming out,” Sentance said. “The big shocks to global consumer and business confidence which we saw last autumn are now beginning to wear out.”

The prospect of a recovery is a boost for Gordon Brown, who last week fought off the biggest threat to his leadership since he became prime minister in 2007 after six ministers quit. His Labour Party trails the opposition Conservatives with a general election due within a year.

In April, economists accused Chancellor the Exchequer of Alistair Darling of being too optimistic when he predicted the U.K. economy will start growing again by the end of the year.

Pound Advances

The pound advanced against the dollar for a fourth day on optimism the worst of the slump is over. It was 0.7 percent higher at $1.6470 as of 10:12 a.m. in London.

Niesr said the U.K. economy shrank 0.9 percent in the three months through May, down from a 1.5 percent pace in the period through April and 1.9 percent through March, which was the worst calendar quarter since 1979.

“I had expected it to be more downward momentum,” said Martin Weale, director of the NIESR said in a Bloomberg Television interview yesterday. “It seems very possible that” the U.K. “will show 0 percent growth in the second quarter bad credit payday advance. I certainly didn’t expect that six weeks ago,” he said.

U.K. consumers’ expectations for store prices in the next year increased in May for the first time in three quarters, a survey for the Bank of England showed today. That may reassure officials that deflation won’t take hold as a result of the economic slump.

Budget Deficits

The U.K. still faces “very large” budget deficits of 12 percent of gross domestic product in the current and coming fiscal years, Sentance said, citing Treasury forecasts.

“Fiscal consolidation will require restraint on the growth of public spending,” he said. “Tight fiscal policies are likely to need to be sustained for five to 10 years.”

The recovery will require the economy to rebalance toward manufacturing and away from banking, Sentance said. A weaker pound relative to the currencies of export markets will help the process, and give producers a competitive advantage.

Consumer spending and financial services “are likely to be much weaker sources of growth,” he said “Other internationally trading sectors will need to pick up the baton from financial services - notably manufacturing industry.”

Bank Lending

The return to economic growth will be subdued as banks restrain lending while they rebuild reserves, Sentance said. Their reluctance to lend more is “sensible” given the losses already incurred from strains in credit markets, and the risk of more to come, he said.

Banks “are likely to be much more cautious about future lending in the wake of significant losses arising from the financial crisis,” he said. “These losses have weakened their capital base and there are worries that further losses may emerge as a result of the recession.”

Britons should prepare themselves for higher unemployment as the economy shifts away from finance, he said.

The process “is not smooth and painless,” he said. “We should therefore brace ourselves for a period when unemployment is probably higher than its natural or normal level for a while,” he said.

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